Looking for signs of life in moribund e-markets

The eerie silence among the major b-to-b online exchanges has some onlookers wondering if they can recover from the e-commerce hangover that’s now entering its third year.

"There are telltale signs that they’re focusing on other things besides expansion and product development," said analyst Vernon Keenan, who specializes in market research for the IT industry. "They’re not hiring, and there haven’t even been many press releases."

In other words, it’s quiet, too quiet—especially when compared with the noise these e-hubs once made about their plans to revamp the way buyers and sellers communicate and transact business.

In addition, the e-marketplace landscape itself has changed. Many independent, venture-backed exchanges have disappeared, leaving relatively few industry-backed exchanges.

Now there are signs that these big industry exchanges, sometimes called consortium exchanges, are quietly mounting a comeback.

The survivors count on heavy backing from the biggest names in their respective industries: automobile, consumer packaged goods, food service and electronics. Slowly adding members, they are pumping a bigger chunk of these sectors’ procurement spending through their online marketplaces.

"The hype is long over, and now we have to focus on the basics—to reduce [e-commerce] infrastructure costs within any one organization by building it on behalf of industry," said Ken Fleming, chief marketing officer at Transora, the consumer goods marketplace backed by Procter & Gamble, Sara Lee, Unilever and others.

Nearly half of Transora’s investors are now active in the exchange, some 12 months after its launch. Whether this growth is a success or a disappointment depends on one’s point of view.

Tackling services

"The biggest problem so far is that the underlying services that exchanges are trying to provide are proving much more difficult to build than anyone anticipated," said Greg White, associate director for business information services at Procter & Gamble.

A perfect example is Transora’s collaborative planning, forecasting and replenishment (CPFR) service. Building such an application requires the creation of standard definitions for different product categories and standards for how ordering and logistics processes are defined by the manufacturers, distributors and retailers involved in any one transaction. Each company handles these activities differently.

"People anticipated that b-to-b e-commerce would be this silver bullet that fixed the fact that we had poor processes in the past," White said. "But sometimes it makes process problems even more visible. Processes are not consistent across the partners, and to re-engineer that takes serious commitment and time."

Yet the exchanges’ investments in new technologies are constrained. Their big-name backers are said to be reluctant to pump more cash into their offspring. Resources for additional hiring and R&D are scarce, and expansion seems unlikely in the near term. What’s more, some backers want to see a return on their initial investments, not solely in the form of increased productivity but in cold cash.

For instance, Big 3 carmakers, which backed the Covisint exchange venture, "have their hands out asking where the money is," said analyst Kevin Prouty of AMR Research.

Slow adoption

There are many ways to gauge the success of these exchanges—auction volume, procurement volume, level of integration with users’ back-end systems for optimal automation. The exchanges don’t freely share these numbers, but the signs are that progress has been snail-like.

Particularly weak has been the adoption rate among the supplier community in each sector. Suppliers remain suspicious. They worry that price pressures will pummel their margins, and they don’t want to shell out the setup and labor costs to comply with each exchange.

"The adoption rate has been nowhere near where we thought it was going to be when we started down this path," White said.

Transora’s Fleming readily admits that suppliers feel alienated, and he’s comfortable taking the blame. "The negative perceptions exist because of what all the exchanges did early on," he said. "From a marketing perspective, we have to get over that image and tell people that squeezing margins is not what we’re about. We’re looking to create automated supply chain efficiencies and collaborative negotiation. We’re about bottom-line savings."

The top priority of these industry exchanges ought to be catering to small suppliers, said Prouty, who suggests they could rent e-business infrastructure to companies that normally couldn’t afford the technology.

Meanwhile, some e-marketplace executives say adoption hasn’t been a problem. "We’ve been blessed with strong industry support for our consortium," said Dan Jankowski, a spokesman for the Covisint auto exchange.

Covisint, founded by DaimlerChrysler, Ford Motor Co. and General Motors, had 5,000 registered member companies in December, nearly two years after the marketplace’s launch. About half of those represented "significant revenue," Jankowski said. The rest were either responders to an auction or came into the exchange through private Covisint portals for Ford, Delphi Automotive and others. There are some 35,000 manufacturers in the auto industry.

But Toyota, Volkswagen and other foreign automakers haven’t joined Covisint, forcing some suppliers to comply with multiple e-commerce systems in order to do business with all their OEM customers.

Auction volume on Covisint totaled $51 billion in 2001, and direct procurement resulted in 95,000 transactions and $100 billion in spending over the exchange. Covisint, which takes a cut of the transactions, won’t disclose its revenue. Revenue should double this year over 2001 and cross the break-even point by the fourth quarter, Jankowski said.

But those dollar-volume figures could be inflated, the result of double counting (buyer and seller), cautioned AMR’s Prouty, adding that Covisint enjoys a captive audience on its exchange for some activities.

Still, the numbers suggest continued momentum despite the weak economy and stigma associated with e-marketplaces.

P&G’s White, for one, is hopeful that perception will turn around. Said White: "Twelve months from now, we won’t be having this conversation."